Bath commercial property: Highs, lows and looking ahead

Strengths and challenges for Bath Commercial property

What does the commercial property market in Bath look like in a post-Covid, energy crisis and cost of living crisis world? And how will it shape the office, retail and industrial sectors this year and longer term?

Offices: Challenging times but some silver linings

There is no getting away from the fact that it has been a challenging market for the office sector. 

The volume of deals had “materially reduced”, said Marshall resulting in an annual take up of just over 60,000 sq ft against an average annual take up of 100,000 sq ft. 

While the final quarter of 2022 “picked up”, his outlook for 2023 was a continuation of low deal volumes.

“Many of the occupiers I’ve spoken to, you can sense there’s been a lot of debate about how much space they need going forward,” said Marshall.

“I think it will be 10 years before the office market really understands where it wants to be,” he added.

But there were silver linings that hint at future trends. Marshall pointed to two notable buildings which have seen their first lettings. Royal Mead is a refurbishment, rated BREEAM excellent, and 1 Bath Quays is the first new office building in the city in 25 years.

“That is a very positive thing; space of that standard has been historically absent from Bath, and businesses have had to go to Bristol or other cities to get decent accommodation,” he explained.

The flight to quality and, in particular, the appetite for more energy-efficient buildings represents a challenge and an opportunity for Bath. Older, historic buildings used as offices may well end up as residential, particularly as changes are coming to EPC for commercial buildings.

“We still have too many offices and need to see some of the poor-quality offices disappear,” said Marshall. “A lot of those historic buildings, unfortunately, are just not suited to office accommodation going forward, but the good news is that they're worth more in capital terms as residential property.”

He said this is driving an increasing volume of change of use, which should hopefully reduce the overall supply of offices. 

Office demand in Bath is generally quite modest, but there is an opportunity here too. 

“We're not likely to see businesses coming here wanting 10-20,000 sq ft. By and large, 3,000-5,000 sq ft is probably the sweet spot; smaller businesses will come to Bath,” said Marshall.

He cited research which shows Bath has the highest number of micro businesses anywhere in the UK relative to population. A micro business is defined as one which is registered for VAT and has four employees or fewer. 

What this means for the market, said Marshall, is strong demand for serviced or flexible workspace as that’s the sort of space these businesses tend to want.

He added that small businesses of 10-20 employees are also looking for serviced space or short leases of 2-3 years, and landlords are recognising that and providing the fit-out as a means of encouraging deals.

Retail & leisure: Bucking national trends

During COVID, Tim Brooksbank said he was worried about his job. “I think we all thought the retail market was going to collapse,” he admitted.

It meant a number of difficult conversations with landlords with vacant units about the need to reduce rents to secure deals. Brooksbank said: “We saw a real shift from landlords; I think they were frightened as well.”

But the strategy worked, rents dropped, and the deals started coming. The previous high for the number of deals was 20 in a year, with two deals a month being a good average. 

“But over the last 12 months, we did 33 retail lettings in the centre of Bath; we just smashed it and couldn't keep up with demand,” he explained. 

What the reduction in rents did was open the door for a lot of smaller independent retailers and F&B businesses. 

“When we came out of COVID, the independents were really quick off the mark. They saw these deals that they once couldn't afford on decent sites in Bath,” said Brooksbank. “The nationals were still licking their wounds and weren't quite as fast.”

The team actively sought out independents from markets like Frome, Weston Super Mare and Bristol to help them expand. The result was lettings to businesses such as Nook, an Australia-influenced café; Vintage Abs, which sells vintage and reworked clothing and Botanica Studio, an indoor plant company.

“They are cool, niche businesses that would never have been able to afford a place in the centre of Bath. They were very quick and got some really incentivised deals.”

Brooksbank said such deals are good for the overall unique mix of offer in Bath, particularly as a regular complaint from shoppers is that the city is “full of chains and cafes”.

But balancing F&B and retail remains a challenge. He said 75-80% of enquiries for space in Bath are from cafes and restaurants. 

“When we get a generic retail use, an independent, it's quite nice, and we work hard to find them a site; it's trying to keep that mix and not fill the high street with F&B,” he explained.

There is still a place for nationals in the city as smaller businesses generally can’t afford the big units on Milsom Street, Union Street, Stall Street and Southgate. 

As a result of this leasing activity, Bath finds itself in a position where lack of stock is a problem. 

“We tend to have between 30 to 40 retail instructions on our books, and as of now, we have 13, eight of which are under offer,” said Brooksbank. “I think Bath’s vacancy rate is around 4-5% which is a lot lower than the national average of around 14%.”

However, he added that this supply/demand imbalance won’t translate into rental growth. The cost-of-living crisis has curbed consumer spending, which means it is still difficult for retailers and rents will plateau for 2-3 years.

“If there's a unique property a lot of retailers want, we might see a bit of an increase [in rents]. But I think in 4-5 years, we will hopefully see some rental growth.”

Industrial & Distribution: From highs to lows and building back?

It’s been a period of highs and lows for Bath’s industrial and distribution sector. Once the initial shock of COVID was out of the way, the market thrived.

“During COVID times, I've never been so busy, it was amazing. I was on this high of deals, deals, deals, and then we got to the middle of last year, and suddenly the plug was just taken out,” said Williams.

Market activity stopping was a huge shock, she admits. Good deals that were lined up fell through, and yields softened: “For a moment, I thought when's this all coming back? It was a really low time.” 

But there is good news; Williams said since the start of the year, enquiries for space came back, and deals that fell through have been put back together. “We are back on track, and I’m quite excited by some of the enquiries that are out there at the moment, particularly from owner-occupiers,” she said.

In the local markets as there are a diverse range of businesses looking for space, trends are difficult to identify from the active enquiries in the market.

On a regional basis, e-commerce remains a key driver. Williams pointed to St Modwen’s development at junction 17 of the M4. “And that's all as a result of online retailers needing to deliver their stock to customers, ie  fulfilment and 3PLs.” 

At a more local level, there is strong demand from small businesses looking for smaller units but “there just aren’t enough units out there”, she said.

Other areas of demand include self-storage companies. Williams described that particular sector as “going great guns”, with ideal sites and buildings having roadside prominence. 

Another surprising area of demand is manufacturing; she said: “I've been quite impressed and excited by the number of quite large-scale manufacturers coming to the market this year.”

Some examples include Kidd Farm Machinery, which bought the 40,000 sq ft Hopton House at Hopton Industrial Estate in Devizes and Grants Engineering, took 80,000 sq ft in Swindon. “We’re talking to another manufacturing company at the moment, which is looking for 40,000 sq ft, and there are others equally inquisitive in the market,” said Williams. 

The challenge for the Bath market and its environs is a lack of supply. Analysing deal data relative to supply, she noted that where stock is available, occupiers have been signed, so there is a positive to be drawn.

“Okay, we've had a rocky year in industrial, but actually, it's not been that rocky because if we'd had the supply, we might have still done the same volume of deals as we did the previous year,” she explained.

Supply in the local Bath market is “a bit of a nightmare”, said Williams, and it’s a problem that doesn’t have an easy solution. “I can't see that the supply will ever be enough to satisfy demand; there is no land, and the land that usually comes up is better suited to other uses,” she explained.

The result is occupiers moving to other areas, but even outside of Bath, space isn’t being developed quickly enough to satisfy demand. 

Find out more about the office, retail and industrial markets in our latest Commercial Edge report, which covers the outlook for the sectors across key regional cities in the UK.